RBA Day: Decisiveness or simply more dithering?

Talk of a possible Greek debt compromise hit the wires earlier this morning with markets, well, largely stocks, rallying hard in the period following its release. For all those who’d like to see what was behind the late session surge click here.

US manufacturing activity expanded at the slowest pace in a year in January with the ISM’s PMI gauge dropping to 53.5. The figure, below the 55.1 level of December and expectations for a decline to 54.5, was led by sharp slowdowns in new orders, deliveries, prices paid, order backlogs and exports with inventories and imports, up 5.5 and 0.5pts respectively, the only gauges to record an improvement during the month. Separately the Markit manufacturing PMI gauge held steady at 53.9, in line with the December reading but above the preliminary estimate of 53.7 released in late January, although the gauge remains well below the recent peak of 57.9 struck in August 2014.

US personal consumption fell by 0.3% in December, below expectations for a decline of 0.2%, with the reading the weakest seen since September 2009. After adjustments for inflation real consumption fell by a 0.1% following a 0.7% increase in November with the decline the first recorded since April 2014. While consumption fell incomes continued to grow with an increase of 0.2% reported. The figure, below expectations for a gain of 0.3%, was the 12th-consecutive month that an increased had been recorded. With incomes growing while consumption fell the national savings ratio jumped to 4.9% from 4.3% in November.

US construction spending rose by 0.4% in December, an improvement on the 0.2% contraction of November but below expectations for an increase of 0.7%. Private-sector spend rose by 0.1%, thanks largely to a 0.3% increase in residential works, while public sector expenditure jumped 1.1% following 1.8% contraction in November.

Activity in Canada’s manufacturing slowed to a crawl in January with the RBC PMI gauge sliding to 51.0. The reading, below the 53.9 level of December, was the weakest level seen since April 2013.

Eurozone manufacturing activity accelerated modestly in January with Markit’s PMI gauge rising to 51.0. The figure, unchanged from the preliminary released late last month, was stronger than the 50.1 reading previously seen in December. As can be seen in the figures below a slight slowdown in Germany, the Eurozone’s largest economy, was more than offset by improved performances elsewhere in the bloc, particularly from Italy, Spain and France.

Outdoing their neighbours across the Channel UK manufacturing activity accelerated at a faster pace in January with the Markit/CIPS PMI gauge rising to 53.0. The reading, above the 52.7 level of December and expectations for a decline to 52.6, was led by modest improvements in orders, both from home and abroad, along with overall output. While a good outcome it was interesting to see the output price subindex, essentially customer prices, fell to 49.0 from 50.6, the lowest level seen since September 2009. Cleary, as demonstrated by other series lately, disinflationary pressures are continuing to build.

The Day Ahead (AEDT)

Australian stocks look set to start the session in the black with SPI futures pointing to a rise of 42pts on the open. Excluding the energy sector which should have a good day regardless following another 3% surge in spot crude overnight, whether the overall index can finish in the black will be solely determined by the RBA policy decision due at 2.30pm this afternoon. The index has been rallying hard in recent weeks, particularly higher-yielding sectors, in anticipation lower interest rates in the period ahead. At the very least the RBA Board will need to adopt an easing bias to keep the buying momentum going. If not, expect to see large-scale profit taking amongst the financial, telecommunications and consumer staple sectors in the latter parts of the session.

The AUDUSD has been grinding higher overnight, firstly on position adjustments before the RBA rate decision afternoon, secondly on the back of more underwhelming data from the States. Given current positioning and expectation in the market the only way I can see the pair losing ground today will be if the RBA eases 0.25% and signals that there are further cuts to come. Should we merely receive an easing bias, or even worse, no change to the wording in the final paragraph of the statement, it will see the pair shoot higher as doubts about the likelihood of easing from the RBA increase. How far this moves goes will be largely determined by whether or not the RBA introduce an easing bias in their statement. Should they implement this, my favoured view today, expect the squeeze higher to be modest in nature. However, should the RBA leave their ‘stability of rates’ line in the final paragraph, certainly not what I’m expecting, not only will we see large-scale short-covering but also additional monetary inflows as higher shorter-dated rates attract yield-hungry international investors. Should the RBA cut expect the pair to test the recent multi-year low of .7720 struck in late January. Should we only receive an easing bias I expect the pair will squeeze up to .7880, perhaps even .7940, depending on the positioning of order books. Should we get neither a rate cut nor an adoption of an easing bias the sky is literally the limit. It’s so unlikely that it’s hard to gauge but, taking an educated guess, it’ll likely be at least to .8020 over the short-term.

The Reserve Bank of Australia will announce their February monetary policy decision at 2.30pm this afternoon. While I think the RBA should cut rates, in my opinion they should have moved pre-emptively late last year, keeping with tradition for being cautious and slow moving I expect that we’ll only see the adoption of an easing bias, not a 25bps rate cut. While it will create some initial disappointment should that eventuate, equities and shorter-dated rates will sell off fractionally while the Australian Dollar will bounce, it will at least keep the expectation that rates are going lower, something that in turn will help maintain the bid in equities and rates and pressurise the Australian Dollar (beyond the short-term, of course).

Australian building approvals and trade figures for December will be released at 11.30am this morning. Approvals are tipped to fall 5% following a 7.5% increase in November while the trade deficit is expected to narrow to $775m from $925m seen previously. Elsewhere in the region we’ll also receive South Korean CPI along with the latest monetary policy decision from the Reserve Bank of India.

Data releases this evening include factory orders, revised durable goods orders and the latest ISM-New York index from the States, PPI figures from the Eurozone and Canada, Italian CPI along with construction PMI and Halifax house price index from the UK. On the monetary policy front FOMC members Bullard and Kocherlakota will also be in action.